New Zealand Inflation Weaker Than RBNZ Forecast; Kiwi Drops

(Bloomberg) -- New Zealand inflation was weaker than economists and the central bank forecast in the second quarter, increasing the odds of an interest-rate cut next month. The currency fell.

  • Consumers price index rose 0.4 percent from year earlier
  • Gain was less than 0.5 percent median forecast of 16 economists
  • Prices rose 0.4 percent from first quarter, when they gained 0.2 percent
  • Economists expected a 0.5% quarterly increase

Most economists forecast Reserve Bank Governor Graeme Wheeler will respond to persistently weak inflation by cutting the official cash rate to 2 percent at the next review on Aug. 11, even as an overheated housing market poses a risk to financial stability. Annual inflation has been below 1 percent for seven straight quarters and the RBNZ in June forecast it won’t return to the midpoint of its 1-3 percent target range until late next year.

Unscheduled Update

The weaker-than-expected inflation data “suggest that the RBNZ may continue to put its worries about the housing market to one side and cut interest rates,” said Paul Dales, chief Australia and New Zealand economist at Capital Economics in Sydney. “We’ll know more after Thursday’s unusual inter-meeting economic update from the bank.”

The RBNZ said last week it will release an unscheduled economic update on July 21. Economists said it may detail how a recent surge in the kiwi dollar is damping import prices and making it more difficult for the central bank to return inflation to target.

The local dollar dropped after the inflation report. It bought 70.76 U.S. cents at 11:35 a.m. in Wellington from 71.58 cents immediately before the release.

New Zealand’s trade-weighted currency index fell to 75.61. The gauge reached a 14-month high of 77.24 last week. The RBNZ in June assumed the index would average 71.6 in the third quarter.

There is a 71 percent chance of an August rate cut, according to swaps data compiled by Bloomberg Monday in Wellington.

Weaker Than Forecast

Annual inflation matched the pace in the first quarter and was weaker than the RBNZ’s June 9 estimate of 0.6 percent. It has been less than 1 percent since the fourth quarter of 2014 and below 2 percent since late 2011.

Prices in the second quarter were led higher by gasoline and the cost of house construction, Statistics New Zealand said in Wellington Monday.

  • Gasoline prices rose 5.3 percent in the quarter. Excluding gasoline, the CPI rose 0.2 percent
  • Non-tradable inflation, a core measure of prices not influenced by the currency, rose 0.3 percent from the first quarter led by construction, electricity and rents, while domestic airfares and rental car charges declined
  • From a year ago, non-tradables prices gained 1.8 percent; the RBNZ projected 1.9 percent
  • Tradables prices, which are influenced by currency movements, gained 0.6 percent from the first quarter led by fuel, while appliance and furniture prices fell
  • From a year ago, tradables prices fell 1.5 percent

The RBNZ forecast in June that inflation would accelerate to 1.3 percent in the fourth quarter of 2016 and reach 2 percent by late 2017.

March Cut

The central bank on June 9 said “further policy easing may be required to ensure that future average inflation settles near the middle of the target range,” while the RBNZ’s bank-bill yield forecasts signaled one further cut. The RBNZ cut the benchmark rate in March to 2.25 percent, a record low.

Traders’ expectations of another cut have been volatile. They dived when Deputy Governor Grant Spencer said July 7 the central bank needed to carefully consider risks to financial stability when setting monetary policy.

Odds of a cut then surged late last week after the RBNZ unexpectedly announced it would release the economic assessment, which economists tipped could signal a lower inflation track. The update won’t include any review of the cash rate, the central bank said.